New high density construction leads to rents falling (Arlington, Fairfax: sale, 2015)

[brooklynborndad]

at least it seems to be happening in some parts of DC

Rents Fall in NoMa, H Street and Upper NW

[tysonsengineer]

Originally Posted by brooklynborndad

at least it seems to be happening in some parts of DC

Rents Fall in NoMa, H Street and Upper NW

Same thing will happen in Fairfax and Arlington. It is simple supply demand. Older stock will have to lower prices in order to attain renters, otherwise, why would anyone rent in the older buildings for the same price as new?

It actually already has occurred in Arlington, look at price discrepancy of buildings older than 15 years and buildings younger than 15 years and thena areas like Route 29 which have grown at a far lower pace than those on R-B corridor.

[Forehead]

I've been in the middle of two of those. My offices were on H street up until this past November, across the street from the massive City Center development. We moved to the Noma area, right next to another large building development. I can't escape the construction no matter where I end up.

[NC211]

This isn't unexpected by any means, regardless of jobs and economics. You could see it coming in the numbers over 3 years ago.

Blizzard of 2010: The Palantine Apartments, developed via a Joint Venture between Monument Realty and Lehman Brothers (LB). LB is in the hands of creditors, with only one goal...sell sell sell. They force Monument's hand to liquidate Palantine instead of restructure and ride it out. Palatine was orignially meant to go condo, but delivered right into the teeth of the media storm of the recession. So, like many others in the area, they coverted to a rental platform which changed up the economics of the investment. The smart move would've been to restructure and hold, but LB wanted out badly. A condo developer of all people from Miami hops on his G4, rents a Humvee and heads to the courthouse during the blizzard to attend the auction for the property. Every single developer is in the room, some with the $9m check to qualify for the bidding in their pocket, but most just to see how this goes (was the first). Bidding stalls at around $98m, with bids moving at $100,000 levels. Then, Mr. Miami stands up with his big voice and says "$118 million dollars". Sold.

Result: Every developer in the room goes for their phone to make two calls. First, the materials suppliers. Second, their lender, to inform them they're back in the game. Mr. Miami paid a 4.25% investment cap rate on the deal, a stunner to say the least. Resulting product first to get started was the more cost effective wood product. Reduced costs, more bang for the buck (my favorite by the way).

Mr. Miami pushes rents at the Palantine by 6% over the next 12 months. Occupancy at the time of sale was around 90%, now it's 95%. He sells it to TIAA CREF for $142 million. Another 4.25% cap rate deal. Result: Wood product is out, high-denisty high-rise concrete is in.

Ultimate result: Investment capital from all over the world essentially carpet bombs DC for apartment plays. Pipeline jams up, and it's a race to get leasing up and running by 2014 and get stabilized before 2015 hits.

In my opinion on what is about to come? The first wave of wood product will be fine. Their cost basis is at a point where a 20% concession rate on the rents will hurt but won't kill. It'll also be a question of how smart they were in picking a lender. Those who went for max proceeds at the cheapest rate, are probably the ones who will take it the hardest. Those lenders probably had to upward trend the rents to top of the market to get the deal. Lenders who didn't trend rents, haircut all of the areas of "other income", like pet fees, parking, amenity fees, etc., those are the deals that'll probably stay out of the ditch.

Areas I think that'll get hit the hardest. First and foremost - The U Street Cooridor. I don't get that submarket. It's bars and the young social scene, usually the last in the door at the job and the first out the door when cuts happen. Rents in that submarket are, in my opinion, the definition of a "bubble". Second, ballpark district. Retail is coming in finally. But daylight through offices can still be seen even after 5 years. Office = jobs. Jobs = renters. Third, and I know it's controversial, is NoMa. Everyone keeps saying NoMa is over-built. But, NoMa has full offices with sizable and stable employers. I think NoMa will cool a bit to absorb, but it'll do just fine. The feeder deals around NoMa will take a hit or two, because they represent the Palantine 2.0 thinking of highrise concrete. All of the deals in NoMa proper, are deals that were in play before the recession hit. They went through a 12 month repositioning period, which allowed the developers to retrade on materials at recession prices, and reduce costs. Smart move. Those further away, like on H Street, not so much. I have a feeling you guys speak this language quite well, even have experience with some of these projects :-)

In terms of the sequester.... again just my opinion here... Once the government has the money, it never leaves the system. Instead, it just becomes less visable.

[brooklynborndad]

Originally Posted by NC211

Second, ballpark district. Retail is coming in finally. But daylight through offices can still be seen even after 5 years. Office = jobs. Jobs = renters. Third, and I know it's controversial, is NoMa. Everyone keeps saying NoMa is over-built. But, NoMa has full offices with sizable and stable employers. I think NoMa will cool a bit to absorb, but it'll do just fine. The feeder deals around NoMa will take a hit or two, because they represent the Palantine 2.0 thinking of highrise concrete. All of the deals in NoMa proper, are deals that were in play before the recession hit. They went through a 12 month repositioning period, which allowed the developers to retrade on materials at recession prices, and reduce costs. Smart move. Those further away, like on H Street, not so much.

I am pretty sure not all the folks who live in the new units in Capital Riverfront work in Capital Riverfront. Many work on the Hill, and some all across downtown DC. Similarly for NoMa. As much as my fellow "urbanists" may dream that mixed use areas with housing and jobs necessarily means folks walking to work in their neighborhoods (just as some folks assume that everyone in a suburban county with a good job/housing balance works a short drive from their house) people do not always choose housing that way. So I do not think the neighborhood specific housing markets are as tied to the neighborhood office markets as your paragraph above seems to imply.

[NC211]

I don't disagree with you brooklyn, we'll just have to wait and see, as those are my own personal predictions. I will offer up the rent and demand premiums realized at projects near a metro station though as a possible example of reference to the idea of renters wanting to have the easiest and shortest path possible to work. Granted, you're right, i'm talking about the inner core of DC. The burb's will be interesting to see how it plays out. I've seen the numbers for Merrifield, and must say, they're impressive to say the least on both the rental side and buy side.
At the end of the day though, the article and our opinions are all correct. The supply/demand equation for the renter is going to be out of whack for a while. Only thing really keeping it afloat is the supply/demand equation for the buyer in several pockets of town, which is just the opposite. That, and of course the interest rate environment. Rates move up, buying power dwindles. Since inventory is low, I don't think increase rates will have that much impact on values, but will drive those thinking of buying back to the rental pool for a while.

[CAVA1990]

I seriously doubt with the gentrification and development along H Steet (as well as the streetcar), plus all the younger people moving in, that rents are going to fall around there.

[seiketsu]

Can't speak for the DC neighborhoods, but in Arlington I've noticed plenty of the following:

- older buildings undergoing "renovation" (i.e., adding stainless steel appliances) and jacking up rents
- newer buildings nowhere near Metro and with few amenities slapping the label of "luxury" on a 600 sq. ft. apartment and charging $2000 for it.

Back in my day, luxury meant having a concierge or doorman, a w/d in unit, a swimming pool (or at LEAST a gym), a party room, a business center, garage parking...now all you have to do to call yourself "luxury" is have a stainless steel microwave.

Given how tight the mortgage/housing market is, I have a hard time believing rents are falling. Tons of six-figure professionals here who can spend $3k on rent. Too many investors buying units, leaving even those able to qualify for a mortgage unable to find suitable housing in their price range.

[brooklynborndad]

Originally Posted by CAVA1990

I seriously doubt with the gentrification and development along H Steet (as well as the streetcar), plus all the younger people moving in, that rents are going to fall around there.

The article is about what has already happened, according to one firmt that monitors the market. Much of that development is new apts, so its adding to supply.

Im not sure of their methodology though, and how they adjust for various changes in apt size, etc.

[brooklynborndad]

Originally Posted by seiketsu

Can't speak for the DC neighborhoods, but in Arlington I've noticed plenty of the following:

- older buildings undergoing "renovation" (i.e., adding stainless steel appliances) and jacking up rents
- newer buildings nowhere near Metro and with few amenities slapping the label of "luxury" on a 600 sq. ft. apartment and charging $2000 for it..

Yup, thats why just preserving old buildings doent assure keeping affordable units.

Given how tight the mortgage/housing market is, I have a hard time believing rents are falling.

The article does not indicate a decline in rents across the region, or even across the District, but just in those submarkets - and the decline was small. At least one firm does see a bigger decling coming in 12 to 18 months as more of the buildings now UC are completed.